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 July 6,
2008 Commentary (weekend edition)-
I sure got a
lot of positive comments about last month's commentary, not only for the
refreshing change of introduction, but also for the material presented. I'm not
feeling as poetic or creative today, so I'll just revert to my old saw about
how incredible I think the market is from a trading standpoint, and we'll leave
it at that. I figure I bought myself a few months of boring intro's with the
last commentary, and then I'll push my creative side again and see what I can
come up with.
The market movement has just been outstanding, especially given the
VIX has barely moved. The intraday ranges and the smoothness of many of the
movements is just fantastic for trading, in my opinion. I won't even get in to
how amazed I am at how it 'sees' my areas, because it will sound too much like
an advertisement, or worse yet, even hint at a 'claim', and you all know I
avoid claims like the plague. What I more mean is I still can't get over how
non-random the market seems, from my perspective. That leads to a little story
for today, and then we'll get off to work. Before we start, though, let's look
at one item of business.
Many times I work my commentary off the chart of the
month. As I've said many times, this is from a link on the upper left of the
home page. Originally this was Jim's Quote of the Week, and the placement on
the home page was sensible. Eventually it morphed into charts instead of
quotes, and hence Jim's Chart of the Month, when the commentary went to a
monthly format. Even though I explain how to find the chart, the web traffic
tells me some people aren't checking it out. Most are, but some, I think,
aren't. Since this in advance chart gives the readers a chance to follow along
in real time, on their own, I want to make sure everyone sees the chart. For
that reason, I reconstructed the commentary page to include the link in the
upper left.
I am not sure if this code will 'cut and paste' without any
glitches, so if your page has any issues, or pulling up the chart has any
issues, please let me know. Otherwise, we'll try this and see how it works. I
post this chart with the commentary, which I usually get done by the Friday of
the weekend of the commentary, but my self-imposed 'deadline' is by Sunday
evening. I will add to the chart the posting date, which will be the same as
the commentary date, or a day or two earlier, just so it is clear when I posted
the chart, too.
Keep in mind, the chart is not a trade recommendation of any kind,
just something to watch in advance as it unfolds, so you will be better
prepared for the upcoming discussion. Maybe the area isn't hit and there will
be no discussion, or maybe it will do something interesting (even though it may
not be the best case scenario for a potential trade I may be looking at) and
I'll have something to say. That's the fun part.
Okay, let's get on to the story
now. It's kind of an irony story. I originally only planned to tell it because
I was going to base about half the charting work on it, and by the time I
finished the first half of the charting, it took all my chart space, and even
at that I didn't do as much as I wanted to. So, I decided to tell an
abbreviated version of the story, without the charts. Recently I've been
talking trading via e-mail with an old trading buddy of mine from way back in
the bubble days. He got out of trading back then, and is just going to get back
in to it. Anyway, whenever he came across a trading book he thought I might
like, he'd e-mail me and ask if I wanted it. If I hadn't read it, and he
thought it was interesting, I'd take it, since, as you all know, I'm a reading
fanatic.
He recently sent me a book on speculation, and I found most of it
quite good. There wasn't a lot of new ideas, but there were some interesting
thoughts, and it was pleasant reading. All but one concept, that is. This was
an area where I disagreed with the author 110%. He said that he felt there were
no useful patterns or anything of any use for speculation in the charts of
various issues. Anyone who thought that patterns repeat in any useful manner,
or that they could read anything off a chart that in any way gave them any kind
of speculative edge, was basically dreaming. Hmmm, I thought, my experience
tells me, in my opinion (since that is all we are discussing here is my
opinion), the exact opposite. So, I finished what otherwise was a very good
book, wondering if the other things, which sounded very plausible, were
worthwhile or not to me, given the view of the author on charts and patterns.
But here is where it got interesting, and lead to the irony of sorts.
My buddy is
an AAPL fanatic, and has always followed their stock. I think AAPL trades
fantastically for my methodology, so I follow it fairly closely, but I only
have so much time, and my primary intraday interest is the Russell mini, so
there is a lot about how it behaves that I haven't seen. So, when we started to
discuss AAPL, via short e-mails during the market day, I started doing a bit
more chart work on the lower timeframes, to supplement the weekly, daily and
60-min work I already had. I used this for some 'context', and did the work all
the way down to the 1-min timeframe (13-min, 3-min, and 1-min).
I began to
mention to this guy to 'watch AAPL at this or that level'. I just wanted to
tell him areas, in advance, where I have things coming together that fit well
with the 'context', in other words, areas I had filtered out as places where I
might be interested in a trade myself if I saw the appropriate price action in
the area. I wasn't in any way suggesting he trade the areas, just watch them
and see what happens. Then maybe later I could have some discussion with him
about what happened. That was all I was thinking. What happened, though, was
pretty cool.
I will be taking this from memory, since I do not want to go back
through every e-mail and write up the exact results to the penny, so take it
for what it is, my best recall to give the gist of it. When I originally
planned to center the commentary around this I was going to show the charts,
cut and paste the e-mails and times, etc. So, I mentioned maybe eight areas to
the guy. Usually I gave two sub-grouping spots, and sometimes said I had more
emphasis on one than the other (based on where the key line(s) came in). As we
all know, this is the area, I need no more precision than that, and any
appropriate reaction anywhere in there is enough for me. But it is always fun
when it reacts right off a sub-grouping.
So, I think like six of them
reacted right off a sub-grouping within say two to four cents and really took
off, one overshot a bit (to another area I had but didn't mention), and one hit
the area, pulled back in a small ABCD set up to take out the area, and launched
over, as I expected based on the pattern. It was also very sequential, in that
I'd say watch $xxx.xx. It would react off that, so I'd do my next area, than
send him another note, saying now watch $yyy.yy. And then once I saw it react
there I'd do the next one, and so on. AAPL was reacting to two basic variations
on my setups, over and over and over. I don't know if AAPL really likes those
variations (they are my two most used variations for almost everything,
including the Russell mini), or if it was just in the mood for them during that
time period. It is something I'm surely going to study in the upcoming weeks. I
also made a few mentions to him in USO and another stock, and those did what I
expected.
What is the point, then? Well, this guy was so blown away that
shortly after that I got an order from him for the books. Understand, this is a
guy with his own style in the past, and I didn't expect he would be a candidate
for the books at all. But he said he absolutely must know how I was doing that,
to see if he can integrate any of that into his own approach. But no, this
isn't a story of how I pointed out a few areas and they played out, and that
sold me some books. Recall the beginning of the story. I had just finished a
book this guy sent me, and a key point in the book was how charts and patterns
are completely useless (although this guy does not believe charts are useless,
and never has).
I thought is was ironic, and funny, how I just finished up the book
basically, went to my charts, and found areas using patterns on charts, and
pretty much nailed a high percentage of the areas in advance for the guy,
within a few cents, each producing substantial reactions. I guess I was just
'lucky', as he said in the book, and the last two charts of the month in here,
posted in advance, both playing out incredibly in my opinion right off the
areas, is just some more 'luck'. Yeah, well, it'll take some convincing to make
me swallow that...
Hey, I'm not making any claims here. I'm not
trying to convince anyone to buy the books. I'm not saying you can make money
trading. You know me, I never make claims. Heck, I didn't even trade the AAPL
areas (that may be about to change, though), I was just showing them to my
buddy in advance so he could see what I do as far as my methodology. I just
wanted to vent against how crazy I think it is that there are a lot of people
out there, some very intelligent and well-published authors, who still think
the market is random and that charting is useless. If that were true, then my
mind is totally baffled by what is happening time and again (not every time,
but a lot more than what I would take to be random) at my areas. But their
minds are made up. And I should be cheering anyway, because if everyone was all
over my methodology, that wouldn't be a good thing for my own trading anyway.
So, that's the story.
Now, before we start, has everyone noticed I
haven't said anything about economics, or inflation? I didn't even crow about
how I've been telling them for years what we were setting up for? I didn't even
say anything about how we have redefined a new level for the saying 'between a
rock and a hard spot' because some are arguing the threat is deflation and
others inflation (or, as I suspect, hyper-inflation), and I think it is both.
Asset prices are deflating from previous insane bubble levels, particularly
home prices and stocks (wait until oil and grains deflate, perhaps a long while
from now, but that's another matter because the average Joe doesn't own them
heavily in a direct sense). But food and energy are inflating at an alarming
pace. Inflation and deflation at the same time.
Personally, I think it is a farce
to use simple, standard metrics to assess the situation, or to say things like
'Deflation is the key issue, the inflation is limited to just food and energy,
hence the approach should be a deflationary approach'. I hear this all day
long. Talk about oversimplified. Perhaps we now have a unique situation, given
how they painted us into a corner with their easy money create a bubble and
hammer the dollar policies, and now there isn't an easy and simple solution. We
have a new twist on stagflation, where we have the slow growth and the
inflation, but we also have a few areas of strong asset price deflation. Stop
arguing about what it is called, and look to solve the problems as they exist.
The problems are pretty clear to me.
And while I'm drifting off task on various
ideas here, since I can't get my fingers under control just yet, let me just go
off on something I really dislike every time I see some mindless talking head
on the idiot box talking like they think they actually know something (okay,
that does sound a little condescending, but these guys are just unreal...). I
recall when they kept saying that oil wasn't at the all time high yet, adjusted
for inflation, and hence it was not a valid argument that oil is an issue. So,
until something surpasses the all-time high in its level of destructiveness,
it's not of any concern, right? Say we are about to get hit by a hurricane, and
the wind speed is expected to be ten miles-per-hour less than the worst
hurricane on record ever, I guess we shouldn't do anything because, after all,
it isn't going to exceed the peak, right? What kind of logic is that? Yet I
hear it all the time.
Then oil did surpass the all time high,
adjusted for inflation, and they totally dropped the point. They didn't even
say what would seem logical based on their previous argument, that now we
better take action, it's at an all-time high now adjusted for inflation. No,
they just disappeared from the commenting scene. But did they disappear for
good? No, they popped up somewhere else. Gold. Rising gold prices mean nothing
here, and especially nothing for inflation, because they are way, way off the
all-time high peak, adjusted for inflation. I see, let's not worry about
inflation until gold is over the inflation adjusted high, by one estimate abut
$2,400, then it will mean something. Let's let the manipulated report numbers
say like 18% and the real number get to say 40%, then you guys will all
disappear, and reappear somewhere else, and we'll then start to take this
inflation thing seriously.
What's the point? These guys are doing damage, and I
think we should all write to the stations and complain about the damage they
are doing. As it is we already have the Fed taking that approach, and myself,
along with many others, feel that by the time they act on inflation the monster
will have risen to incredible strength, like some Sci-Fi creature feeding on
energy from power lines or something, until it is almost unstoppable...
Okay, I went
a little wild there (sorry), so let's get to work. We'll start out with last
month's chart of the month, in the S&P Index.
Here was last month's chart of the month, as
the market was when I posted it. I think I need to explain a little bit about
what I am looking for in something like this. The middle arrow is obviously the
setup area. The setup, though, the potential trade area (PTA) has a lot of
'context' to it. The
predominant set here is downsloping. That is in the 'context' of some upsloping
lines you can see coming in. For any given setup I am starting 'top down' and
doing the work on all the timeframes, seeing how it all fits together.
The
methodology is 'fractal' in nature, in that all the pieces are the same
regardless of the timeframe, and the pieces fit together across the timeframes.
I have a little bit on this in
this FAQ. I'm just looking for the same setups across the timeframes,
and seeing how they fit into the other timeframes. This allows me to see if I
think something has room to run to the next area, and I can see what areas are
in front of me, and from what timeframes, and use them for management purposes.
I tend to give priority to the higher timeframe setups, all other things equal,
but in reality I've worked with the methodology enough to be able to
holistically assess what areas are likely to hold sway given the entire layout
and the reactions so far. That's just a matter of experience i.e. 'screen
time', like having swung a golf club or shot a free throw so many times you
just get the feel for it.
Now, the point is, I want to trade with the trend, which
I feel is down in here. That is based on the previous month's setup, which is a
big one. We will review the progress on that later. So here I would perhaps use
this smaller setup as a way to get on board a larger unfolding trend. The upper
arrow with the question mark is to signify if I don't get a trigger off this
area, then I would be looking up there next. The lower arrow shows an area, if
reached, that I would expect a bounce might occur. Depending on my initial
premise, I may want to tighten up a stop in there, or I may just 'take the
heat' if my play is for the longer move.
The lower arrow does not
necessarily signify the next potential trading area, because I don't like to
play too much countertrend. But before I say that too strongly, if a bounce
develops off a countertrend area, and I have an area overhead that I think is a
highly probable area for it to reach, I may drop down a few timeframes and play
with that uptrend, using the same setups, on the premise that trend may
continue to the next area. That's the fractal aspect in play. I hope this isn't
too confusing. It's really not when I show it one-on-one with charts.
Now, with all
that information under our belts, let's see what happened a little bit further
ahead from here.
The S&P triggered right off the area (the
ES pre-market pattern setup and trigger right after the open was beautiful, in
my opinion), and as you can see, dropped substantially. It was beautifully set
up for completing a '3-drives' pattern right into the area of the lower arrow
when they decided to come in for it. Understand that by this time the S&P
had dropped over 36 points high to low already (37.75 in the ES if my data is
correct), more than enough based on the setup for me to be happy with that, as
far as being able to make potential management decisions.
The S&P,
though, starts up strong, putting in a higher low. Long before that expansion
bar up is completed I can be making decisions based on my original premise as
to how I might mange this. One other thing you may notice on this chart is that
I added on the one upper outer division line for the set (the dotted blue line
overhead). Since it was playing line to line between the median line and the
upper parallel, once that upper parallel 'went' (got taken out), the next place
I wanted to watch, from the standpoint of managing the short side and seeing if
staying in for the higher timeframe move was feasible, was at that division
line.
I'll move ahead a bit and see what happened.
The S&P jumped up to the division line
(which also formed a double pattern convergence at some key Fib numbers, which
I didn't show for clarity), essentially testing the level of the initial area,
and then it really began to drop off. At the point shown here, it was down over
75 points high to low. So, if your first thought was there was no way you'd be
willing to sit through such a big checkback, then you know something about your
premise, don't you? And there is nothing to say one can't have two simultaneous
plays going on at the same time. Some people, when they scale out, fail to see
that they may actually be playing two different premises, or strategies, at the
same time. I frequently construct plays in that manner.
Lastly, can
you see how the rhythm and balance of this downsloping set is really guiding
the action so far? And what's the plan from here? You know it will bounce at
some point, what's the plan? You need to know well before now what the plan is.
How much heat, based on what technicals, where are the next big areas on the
way down, and if it bounces, where are the areas for the rollover back down?
Without that information I would have a hard time constructing a management
plan that had any technical merit.
Let's see where this went, as of the time of
this writing.
The S&P started a nice correction right
after that last chart, into an ABCD
pattern. It then dropped off that like a stone, and then did another
really great-looking ABCD, and then really started to sell. You should be able
to see both of those ABCD's on this chart. And look at how the price just flows
with the set. From the area I posted in advance, the move was almost 154
points. Take off some points for the potential entry trigger as it started to
roll, and you can see the potential. I'm not making any claims here, only
saying look what I showed in advance, and look what happened from there. Not
too bad, in my opinion, and surely something I would think was potentially
workable. I hope you followed along in real time, which is the point of me
showing this, so you could compare notes at out next meeting.
Now, let's
jump back to the daily chart, and the bigger setup from the chart of the month
from two commentaries back.
We followed up on this last month, and here's
the follow up showing what has happened since then. That arrow showed where I
posted the chart, in advance, before the area was hit. Now think about the
setup we just covered, and what it looks like here, and tell me if you think
that initial checkback was excessive, or would be an issue for a trade based on
this timeframe? See, it is all relative to what the premise is, and what
timeframe the play is constructed on. You can use the various setups for bias
for lower timeframe setups, or you can play them 'straight up' on the 'traded
timeframe' for the setup itself. There are many possible approaches, and even
blended approaches.
Now, let's jump up to the weekly's for the S&P, and
then the INDU.
Here's the S&P, showing just my one main,
key weekly set that I have had on for some time. This set is based around the
last bear market low area, in '02 and '03. Notice the two bounces at the key
.382 and division line area. It sure looks like the bulls have had their fun,
and the next line area is next. But, this gets into prediction, and I'm not in
that game. I leave that to those with 1-900 numbers. I just know that if it
gets there, I will be watching for a possible bounce. This has all the look of
a 'wave 3' here, or even a CD leg, and those would imply lower areas. But this
lower line a super-mega key one for me, and if there is no bounce there, that
would be a big clue for me.
Now, my hands are getting some writers cramp, and I'd
like to be done, but I always struggle with the feeling of only showing like 1%
of that I could discuss (literally), so I will say a few more things. There is
a discrepancy with the INDU here, and a discrepancy with some time factors,
too, and that has me wondering how this will play out. And maybe it doesn't
play out, maybe it goes straight up from here and the areas are never
approached. It could happen, and means nothing to my methodology.
I don't say
my areas will be reached, I say that if they are, and if I see a
certain reaction, I may be interested in a trade. That's all I say. You never
hear poker players predicting what the turn card, or the river card will be,
you see them saying what they will do if the card is this or that, and if the
guy reacts this or that way. See the point? I have zero idea what the next card
will be, and zero idea what the market will do the next day, or where it will
go. I only know how I will react to perceived edges at various places.
So, here's
what I am getting at. Based on some work I have been doing outside the
methodology, I am seeing a time factor around October for a potential bounce up
of intermediate-term consequence. This is not related to the usual 'bottom in
October' theories. And notice how the one Fib line (I have others, but showed
just this one for clarity) hits the key median line lower parallel around that
time period. So far, so good. That may play out. But the market is really
moving down fast in here, and a quick drop further below those key lows may
trigger some panic selling, a jump in the VIX to 35 or higher, and an
intermediate-term climax. That could happen in the line and Fib area right
below. The issue for me is the INDU.
Let's look at the INDU weekly chart.
The INDU had been leading down (as an aside,
this downsloping set was on my chart well before the upper arrow, and was
useful in seeing that area as a potential shorting spot), mostly based on it
not being so broad of an index, and due to many of the components being in the
hardest hit sectors. Its key area is right below. It also has another area that
lines up with the October timeframe a bit better, but it is much lower. So, how
do these both do what they need to do, and have it fit this framework? Well,
maybe this framework will be completely ignored. That's one scenario.
Another
possibility is that the S&P is about to play catch up. I noticed something
the last few trading days. They are taking the leaders out to the woodshed and
pounding them real bad. This can be the start of the real action when this
happens. Look at coal, rails, dry shippers, solar, farm/fertilizer stocks, all
the super-high flyers that have been setting new all-time highs almost daily.
They are getting hammered. This should affect the S&P a lot more
than the INDU, I think. Maybe the S&P is going to hit its proportionally
further down area as the INDU hits its upper area. The S&P does have an
analogous area lower for the INDU lower area, I just didn't show it.
I wanted to
explain all this because I used the S&P chart for the chart of the month.
It is just far too complex of a situation to not give some detail on, even
though that was the original plan for the chart of the month. The last few
months I showed pretty straightforward setups, and they played out incredibly
well, and that was great for discussion, but I wanted to try something a little
different now that may lead to some more complex discussion in the future,
depending on how it plays out, And maybe it never goes near the area, and there
isn't anything to discuss. But my goal is not to just try to wow people with in
advance setups, but to educate, and I want to choose something with high
education potential if we do get certain action from here. So, keep in mind
some of the things I've mentioned as you watch this one.
Okay, that's
all for me. The commentary just seem to keep getting longer, and all I can
think about now is should I go for ice or the heating pad for my hands, and is
ibuprofen better than acetaminophen? One of these days I'm going to shorten
this commentary up, but I get such incredibly positive comments on it that I
just can't help but get sucked in. For now, though, I'm going to go and enjoy
the various festivities going on outside. Hey, maybe if I had a cold drink in
each hand nobody would notice, and that would ice down my hands....
The next commentary will be next
month's edition, posted by Sunday evening, August 3, 2008.
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